Dr. Elliot Eisenberg, Consulting Economist
March 2021 National Market Observations Q & A
(based on data from February 2021)
Q: Dr. Eisenberg, what do you see happening with inflation, especially in light of all of the recent federal stimulus monies that are rolling into the economy?
A: This is an excellent question with a two-part answer. First, yes there will absolutely be inflationary pressures from the combined December $908 billion and the recent $1.9 trillion stimulus packages. After all, this equals nearly $2.8 trillion, or almost 15% of GDP, and will roll through the economy in a relatively short period of time. In and of themselves, these stimulus funds will be mildly inflationary, though not profoundly so. However, we will see this stimulative inflation coupled with what we refer to as the “base effect.” After the onset of the pandemic in early 2020, prices for goods and services generally collapsed. Since then, the economy has largely recovered and prices are increasingly returning to pre-pandemic levels, and as such, look very high compared to spring 2020. Combined, these two effects are likely to result in Y-o-Y inflation levels of around 3-4% over the next months. While this certainly may generate alarmist headlines, it does not foreshadow long term inflation. By next year, as the stimulus impact winds down and the base effect goes away, we should return to annual inflation of around 2.3%.
Q: Dr. Eisenberg, what is “lock-in” and how will it impact the supply of available homes on the market?
A: Great question! The lock-in phenomenon is something that happens in the housing market any time interest rates decline substantially. When there is a steep drop in interest rates, there is a corresponding increase in new home purchases and an even larger re-financing wave. We now have a huge cohort of homeowners with very low interest rate mortgages, and they will think very long and hard before giving up their low, low rates and low payments. This discourages movement either up or down in the housing market, as a buyer considering purchasing “up” will think very carefully before they look to buy a new home because not only will they have the incremental cost of a new house but also the higher rate mortgage. Conversely, owners who might otherwise downsize may reconsider if their interest rate and corresponding payment go up. We’ve seen this before, most recently in 2012/2013. The lock-in effect fades over time as people do eventually sell, perhaps because they move for jobs or family reasons, people retire and relocate, or their family situation changes. In terms of impact on housing market, this will clearly exacerbate the existing problems with housing supply. How bad this will be is dependent upon on how much rates go up.
Q: Dr. Eisenberg, as the economy recovers and opens as the result of increasing rates of vaccination, do you see a significant shift in consumer spending patterns? If so, how do you see that impacting the housing market?
A: The answer to your first question is yes, but I believe the shift will happen slowly. As the economy opens and people resume a pre-COVID lifestyle, it’s impossible to believe that people won’t resume some of their pre-pandemic consumption of services. Think about how anxious we all are to go to a restaurant or bar, attend a sporting event, travel, or even get a haircut or dental work. But our collective memory of the virus isn’t going to quickly fade away. People will likely rachet up spending for services slowly, as it will take time for people to be comfortable resuming these types of activities.
In terms of the housing market specifically, I believe the last year has fundamentally changed how people think about housing. The last year has made most of us value more and better space in a way that we did not before we spent most of this past year at home. Second, there are demographic factors that will keep homebuyers in the market, specifically, the number of people aging into their prime homebuying years will be high for the next decade or so as the Millennial and Gen Z generations anxiously await their opportunity to buy homes. Third, credit availability will improve as the economy improves, and more people will be able to access all-important homebuying credit. Finally, there is a tremendous amount of forced savings, resulting from a combination of saved stimulus funds and an inability to spend, which is currently about $2 trillion and growing. As such, more and more Americans can dip into some of that money without reducing their ability to pay for housing. Combined, these factors make buying “stuff” like houses more appealing and ensures that we are not likely to see a slowdown in housing demand anytime soon.
Thanks to Realogy Title Companies for helping set up this amazing opportunity to hear from Dr. Elliot Eisenberg. Should you be interested in learning more about Dr. Eisenberg, we encourage you to visit his website at www.econ70.com.